AVI Japan Opportunity Trust (LSE:AJOT) — Interim Results

0:00 Good morning, and welcome to the AVI JAPAN OPPORTUNITY TRUST PLC interim results investor presentation. Perhaps recorded meeting, investors will be in listen only mode. Questions can be submitted anytime by the Q and A tab situated on the right hand corner of your screen. Just simply type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. Have a review of questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to the AVI team. Good morning.

0:28 Good morning. A warm welcome to all of you, and thank you for joining us. I'm Joe Baumfreund, the manager of AVI JAPAN OPPORTUNITY TRUST, and I'm joined here by Nicola Takada Wood, Managing Director of Japan And Asset Value Investors.

0:46 So the purpose of this presentation this morning is to discuss the performance of the Trust over the six months to the June 30. June 30 was quite a while ago, almost three months ago. We're also going to talk about how the portfolio is positioned today, where we see the opportunities, and what we think about the future prospects for the opportunity set going forward. A quick recap for all of you. AVI JAPAN OPPORTUNITIES TRUST is about £450,000,000 of total assets. It's focused on the small cap opportunity In Japan, it focuses heavily through a concentrated portfolio, high conviction ideas, and we utilize an intense process of shareholder engagement I should say constructive engagement with the companies in which we invest.

1:40 Over the eight years that we've been running the Trust, we've delivered 25% outperformance and and we see the prospects for that pretty strongly. The last year, as you see here on the graph at the top of the slide, has been one in which we've delivered a small absolute return, but quite a way behind the broad benchmark. We'll spend some time talking about that as we go through the presentation.

2:11 If we look back over the course of 2026 so far, there are a number of factors and events that we would highlight that are relevant to the opportunity set and to the performance of the portfolio.

2:28 We've seen in the last year, year and a half, a new Prime Minister come into Japan with a focus on stimulating the economy, which has been pretty effective, I should say. There are certain sectors that have been in focus, not necessarily the same sectors that we invest in. More relevant to our performance, it's been a period of about eighteen months up until July this year in which we have not had any corporate activity in the portfolio, by which I mean a takeover, a management buyout or some form of corporate activity affecting names in portfolio. That changed in July when we saw a tender offer a takeover bid made for Sharing Technology, our largest holding, which added substantially to performance over the last two or three months.

3:20 And it's our contention that we will likely see some more corporate activity as time marches on in the next few months. It's also the first period in which we're reporting since AJOT merged with Fidelity Japan. And the merger of that trust and the growth in the assets, really, has led us to invest much of those proceeds in existing names, become larger shareholders in the companies we own, with the objective of being a more dominant shareholder and being more effective in our engagement. As you look down in a few slides' time at our portfolio list, you'll see that there are quite a few holdings in which we hold substantial stakes over 20%, in some cases around 30%.

4:14 And it's been a deliberate strategy of ours to become much larger shareholders in order to drive that engagement further. It's fair to say that the outcome of sharing technology that we saw a couple of months ago is the result of that kind of engagement with that kind of size stake that we have in companies. So despite the performance over the last period, we're very excited about the prospects of the portfolio. As I said, we're large shareholders in a good number of names. And overall, we're pretty positive with the dialogue and the conversation that we're having with management. When we look back over the past year, as you'd expect, there have been some contributors and some detractors.

5:02 A number of our holdings have developed very well, both in terms of corporate activity, such as sharing technology, but also in terms of the results of engagement, such as Bravo, and both engagement and operational performance in the case of Mitsubishi Logistics and other shareholders coming round to our narrative and our thesis of some of those companies. In terms of detractors, you'll see that we've had one or two standout detractors Synchro Food and Broad Media. That is in both those situations, we are large shareholders and we'll have to see how those situations develop in the months ahead. When we look at the broad market, you'll be aware that Japan has had a good year, generally.

5:52 The Topics Index has performed very strongly And when you look, when you peel beneath the layers of that performance, what you see is that a number of the sectors that have been the strongest performers have been the kind of sectors that you wouldn't necessarily expect AVI to be exposed to, It's been a beneficiary of the high growth AI related theme. Large caps have also done well on the back, in some cases, of a weaker yen. Again, our focus is small cap, a lot of exposure to the domestic economy rather than to the larger exporters. So I think it's positive that there's been a good year for Japan generally. It's generated a lot of excitement and positive sentiment towards Japan.

6:41 There are signs that that is trickling down to the small cap. And in fact, when one looks back over time, this is now, I think, the longest period of many years in which small caps have underperformed large caps. So, you know, a very positive omen for a turnaround in that atom.

7:04 As I said in the introduction, as our assets have grown, a key objective of ours is to become larger, more dominant shareholders in the companies we own. When we started this strategy eight years ago, we had an objective of becoming a 1% shareholder so that we could submit shareholder resolutions to AGM. And on occasion, we wanted to be a 5% shareholder so that public became aware of our stake in particular companies. As time has marched on and as our strategy has developed and evolved, we've recognized that trying to be in the driving seat is the most effective way of engaging with companies. When you're a 20%, 25%, 30% shareholder in a company, on most occasions, the company has to listen to you, and that's particularly so when there are other activists on the same register, which in a number of holdings is the case.

8:07 I mentioned sharing technology. This was the end of our famine, I should say, of eighteen months period in which we went without having any takeover bids. This was a successful investment for us, although at times over the last year, the performance was poor and it was frustrating not being able to buy more of that company as we were at the limit and also restricted because we were aware of what was going on. But typically, this is the way it works when you own a large stake in a company and you're having quite detailed, intense engagement with the company. Not making any predictions about what's happening in the future, but the fact that we have a good handful of similar size positions, similar age positions and are in discussions with management suggests perhaps that there should be some more corporate activity in the months ahead.

9:03 So we wanted to take a few minutes to talk also about the corporate governance environment in Japan. As many of you will remember, this strategy was really launched around the opportunity that we saw, what we think is a once in a generation opportunity, in terms of what's happening in Japan with corporate governance reform, and that was started about ten years ago. Now fast forward to 2026, this has been a really critical year for corporate governance reform in Japan, and there have been a couple of very important milestones that we think are worth highlighting. The first is that the corporate governance code, which is what started all of this off a decade ago, has been revised this year for the first time in five years. And what we've seen is quite a nuance upgrade to the corporate governance code.

9:55 Originally, the focus was around building a framework, a better framework of corporate governance in the country. Now that framework is pretty well established, the Financial Service Authority is now talking about substance rather than form. What they mean by that is that you can have the structure. You can have more independent directors on a board. You can have companies which are unwinding shareholdings. But are those changes actually leading to value creation at these companies? And this is now going to be the next era of focus for the Financial Services Authority and the Corporate Governance Code. We think it's important to highlight that this is really meaningful for us and for actually all active investors in Japan.

10:44 There have been some concerns raised that there may be a pushback against activists, for example, in Japan. We don't think that is the case. Some of the changes that have been made have been things like it now requires 5% ownership of a company rather than 3% to call an extraordinary general meeting as an example. What that means in reality is actually quite a limited change. We would, for example, not call an EGM unless we already owned more than 5%. What these changes are doing is actually bringing Japan more in line with other developed capital markets and we believe that this is a good thing. This also provides a more attractive framework for corporate activity and that is definitely something that we have been seeing over the past two to three years. Last year, there was a record level of $92,000,000,000 corporate activity in Japan.

11:44 Much of that was actually focused around small mid cap companies and that is the area, as many of you know, that we tend to focus on. So, this is a very positive development for us. The other milestone that we also think is worth mentioning is the topic. So the Tokyo Stock Exchange has launched a two year revamp, as they're calling it, of the Topics Index. They are focusing on not making it not only making it more

12:18 difficult or or raising the criteria for listing on the topics, but also to remain listed. There are 4,000 listed companies in Japan, and the Tokyo Stock Exchange has said that at the end of this two year revamp, they're hoping that hundreds of those companies will no longer be listed and that the topics will be improving the quality overall of the companies within the index. This is again particularly meaningful for the area of the market that we tend to focus in. There are more details here in very small text if you'd like to you'd like to look at it later. When we think about how we engage in our entire investment and engagement process, all of these changes are really making what we do more effective and what what active managers in Japan do more effective.

13:12 Yes. The framework has been improved over the past ten years, but now what we focus on is value creation and that framework only serves to make that value creation process more seamless from our perspective. You can see here, what we focus on is really across the gamut. We don't just focus on balance sheet improvements like a lot of other investors might do. We also really focus on strategic considerations, operational improvements and yes, in some cases like we've seen with sharing technology, that can lead to corporate transactions. If you look at some of the highlights from the past well, those first six months, 2026 to date, you can see that there's a wide variety of improvements that we've seen in our companies.

14:04 For example, you have ROTUNITY on the left hand side. They pushed through the first price increase in decades, I believe, amongst products. If you also look at the company, Mitsubishi Logistics, on the bottom, you will see that they have announced pretty significant lowering across shareholdings sharing technology on the top right, as Jo mentioned, is a recent success story in terms of corporate activity as well.

14:36 So turning now to our portfolio, a couple of features to highlight on this slide. The portfolio is very concentrated, as we've discussed. The top 10 make up 70% of the portfolio today. And you'll see that the very largest holding is sharing technology, which is effectively now cash, and indeed we expect to receive that cash at the end of November. A number of the holdings below sharing technology have been increased in recent weeks and months as the conviction around the engagement and the opportunity and evaluation evolves. The other feature, just to highlight, of interest to you, the return on investment thus far gives you an indication of profitability that we've generated so far.

15:23 Also, the ownership is interesting. You'll see a good number in the 20s or approaching 20% in the top 10, where we are dominant shareholders. And the last column is giving you indication of the valuation, so relatively low multiples on average, 6.9 times across the top 10, with an NFV net financial value that is cash, listed securities and real estate representing almost half the market cap of these companies. So we continue to find opportunities amongst good quality operating businesses, businesses with very strong, actually inefficient balance sheets, too much capital on the balance sheets and very low valuations compared to the overall market. Related to that, we wanted to show you a couple of new ideas that have come into the portfolio, really to reinforce the message that the opportunity set is as strong as it ever has been. There's certainly no shortage of ideas.

16:21 With a concentrated portfolio and an objective to be a large shareholder in companies, there's not always capital available to increase our stake in some of the new ideas, and indeed, we do pass on some ideas just simply because we don't have the capital available and want to keep the portfolio really concentrated and high conviction. But with the larger positions now effectively cash and hopefully real cash at the end of November, We've started building a number of new positions, some of which may evolve into being the largest positions over time. So the message really is that when we look back over the last six months, indeed, over the last twelve to eighteen months, it's been a year in which we've continued to do what we've done since we've launched the Trust, and that is identify good quality businesses that we think are substantially undervalued become important, large, significant shareholders of those companies build a relationship with the management so that we can engage constructively with them to improve things for management, for employees and for all shareholders, and sometimes

17:39 to result in the company no longer being a listed company through some form of corporate activity. Our engagement and our focus on operations and strategy is generally well received by companies. We're providing them with the answers to the questions that keep them awake at night. And it should be no surprise to investors that the performance and the returns generated by the Trust over the short term can be quite lumpy, as we are dependent on idiosyncratic factors and the results of some corporate activity, which obviously can be a long time in the making. But from where we sit, the opportunity is as strong as it's ever been. The growing, team I should say, and working effectively and working hard in partnership with the companies that we invest in.

18:34 So, you for joining us this morning. As you heard in the introduction, we're happy to take some questions. We've received some questions which we're happy to talk through. The first question we've had through you thank you for sending them the first one is: With strategy focusing on actively engaging with management, what's the typical timeframe to implement change? How do you plan this from initial engagement and to action or inaction? So a question around timeframe. Yeah, so as the question suggests, we have to be realistic about the timeframe. Engaging with a company, building a relationship with management takes time, and you can't expect to change things, particularly in an environment such as Japan, overnight.

19:22 Our objective is typically that over a three year period we'll start to make substantial improvements to the problems and the issues that we identify at a company. You certainly don't want to be aggressive in the first year of ownership. You want to build the relationship. You don't want to submit resolutions to an AGM or call an EGM in the first year of ownership. So, being realistic and setting realistic milestones is a key part of the investment process. Something around a three year period, as a minimum, is typical for us. Also have a couple of questions around position sizing within the portfolio. As Jo mentioned, we take concentrated positions, quite lumpy positions, and how we think about position sizing and how that relates to concentration risk.

20:10 Well, the first thing to say is that we are managing an investment trust, a closed end fund structure, and that gives us the luxury of not having to deal with daily redemptions and subscriptions, inflows and outflows into the fund. And that stable base of capital is exactly what we wanted in order to pursue this strategy, because it allows us to be patient and to be constructive and to work effectively with management. So it's about finding a balance. You'll see that the largest positions are generally around ten-eleven percent. It's rare for them to become much larger. But we have a good spread of names in industries, so fifteen twenty names typically across the portfolio and also quite a variety when it comes to the liquidity of some of the names in the portfolio.

21:01 So it's really about finding a balance between wanting to be high conviction and concentrated and ensuring that the results of our efforts actually move the needle, as opposed to being overly diversified and then you end up with market performance. But the structure does afford us the luxury of being able to tolerate some concentration for periods of time. I think we have one final question around how the portfolio net financial value has shifted somewhat more towards real estate over time, which is a very astute observation and also quite important. Yeah. So I think it's a good question. Certainly eight years ago years ago indeed, it was more difficult to find companies with huge amounts of surplus cash on the balance sheet.

21:55 In that time, as a result of our activities and the corporate governance environment in general, you've seen companies respond by having higher payout ratios, by paying special dividends and significantly by buying back shares quite extensively. And that has meant that cash on the balance sheet has become less of a feature. It's still very excessive when you go down the cap spectrum towards microcap, but around small mid cap companies. It's more about other assets, so it's still across shareholdings, strategic shareholdings, and it's also real estate. Real estate is very interesting to us simply because there is a lot of appetite from private equity investors in Japan, both domestic and global names, for opportunities amongst the 4,000 listed companies that you see in Japan. They're undervalued, they're undermanaged, and often they preside over very inefficient balance sheets.

22:56 And certainly, depending upon the private equity outfit, there's a strong interest in being able to acquire attractive, good quality real estate assets via these corporate transactions at attractive valuations. So, you know, we found a good number of companies with attractive real estate assets, and we're certainly having quite fruitful conversations with other investors about the value of those assets and the opportunities to explore that. Want to take that question? So we have a question around the risk changes in the regulatory environment emphasising that sorry, emphasis to changes that it reduces the ability of activist investors to reap the full rewards of corporate restructuring, placing greater emphasis on benefits to the wider Japanese community, is this a view that we discount or share?

23:55 As we mentioned earlier, what we would say our takeaway from the changes is that it actually just brings Japan more in line with other developed economies, other regulatory frameworks around capital markets and corporate activity. In fact, there was a recent case which would support that theory where an activist investor took a company it was invested in to court in Japan because that company was trying to implement a poison pill, and the courts actually sided with the activist investor rather than the Japanese company. So I think what is important when we look at the overall framework is to take a step back and to understand that all of these different regulators, all of these different institutions are really pushing in the same direction and that has been for the past decade and I think it will be for the next decade to create create an environment that is more sophisticated when it comes to capital markets and also more supportive for investment in the Japanese markets.

24:57 It's also the overwhelming evidence from our engagement with portfolio companies and management that they are much more open to hearing suggestions as to what they can do to make things better for shareholders. Yes, they are interested in other stakeholders, but nobody's thrown these revisions in our face and said, know, go away, you've got nothing left to talk about. You know, think the government's change of attack. That's not really the case. It's not the motivation, in fact. And ten years into the life of the government's reform agenda in Japan, we see really 180 degree different attitudes to to us and to the things that we're suggesting from the government ten years ago. Fantastic. Thank you very much indeed. You have covered all for those questions we have from investors. Of course, further questions come through, the company will have the ability to review those.

25:48 And we publishes responses where appropriate to do so on the Investor Meet company platform. Just before redirecting investors to provide you with their feedback, no particularly important to you and the team, Joe, if I may just ask you for a few closing comments. Well, thank you. Yes. I mean, I would say that Japan is still one of the most exciting markets we see in the world.

26:06 There's still a great valuation opportunity. But moreover, what's happened over the last few years is Japan has performed well. And that has really inspired confidence from a whole range of investors who probably grew up in this industry with the idea and the notion that Japan was a career risk and never really recovered from the sentiment after the bubble burst in 1990. What we see in Japan is fantastic companies. We see a strong macroeconomic tailwind. Companies are growing their profitability. Companies want to address the undervaluation. There are more activists. There are more private equity investors in Japan. And all of that bodes extremely well for the opportunity set for reversing the undervaluation and for driving returns for our investors.

26:56 So thank you again for joining us today.

26:59 Fantastic. Look, thank you indeed for updating investors. Can I please ask investors not to close this session? It should be automatically redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to compete, It's greatly valued by the company. On behalf of the management team of the AVI JAPAN OPPORTUNITY TRUST PLC, we'd like to thank you for attending today's presentation. That concludes today's session.